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This
was published on January 2, 2013, in Ron Pauls Monetary Policy
Anthology: Materials From the Chairmanship of the Subcommittee on
Domestic Monetary Policy and Technology, US House of Representatives,
112th Congress.

The scholarly
contributions of Murray N. Rothbard span numerous disciplines, and
may be found in dozens of books and thousands of articles. But even
if we confine ourselves to the topic of money, the subject of this
volume, we still find his contributions copious and significant.

As an American
monetary historian Rothbard traced the party politics, the pressure
groups, and the academic apologists behind the various national
banking schemes throughout American history. As a popularizer of
monetary theory and history he showed the public what government
was really up to as it took greater and greater control over money.
As a business cycle expert he wrote scholarly books on the Panic
of 1819 and the Great Depression, finding the roots of both in artificial
credit expansion. And while the locus classicus of monetary
theory in the tradition of the Austrian School is Ludwig von Mises
1912 work The
Theory of Money and Credit, the most thorough shorter overview
of Austrian monetary theory is surely chapter 10 of Rothbards treatise
Man,
Economy and State.

Rothbard placed
great emphasis on the central monetary insight of classical economics,
namely that the quantity of money is unimportant to economic progress.
There is no need for the money supply to be artificially expanded
in order to keep pace with population, economic growth, or any other
factor. As long as prices are free to fluctuate, changes in the
purchasing power of money can accommodate increases in production,
increases in money demand, changes in population, or whatever. If
production increases, for example, prices simply fall, and the same
amount of money can now facilitate an increased number of transactions
commensurate with the greater abundance of goods. Any attempt by
"monetary policy" to keep prices from falling, to accommodate
an increase in the demand for money, or to establish "price
stability," will yield only instability, entrepreneurial confusion,
and the boom-bust cycle. There is no way for central bank policy
or any form of artificial credit expansion to improve upon the micro-level
adjustments that take place at every moment in the market.

With the exception
of the Austrian School of economics, to which Rothbard made so many
important contributions throughout his career, professional economists
have treated money as a good that must be produced by a monopoly
 either the government itself or its authorized central bank. Rothbard,
on the other hand, teaches that money is a commodity (albeit one
with unique attributes) that can be produced without government
involvement. Rothbards history of money, in fact, is a history
of small steps, the importance of which are often appreciated only
in hindsight, by which government insinuated its way into the business
of money production.

It was Carl
Menger who demonstrated how money could emerge on the free market,
and Ludwig von Mises who demonstrated that it had to emerge that
way. In this as in so many other areas, Mises broke with the reigning
orthodoxy, which in this case held that money was a creation of
the state and held its value because of the states seal of approval.
A corollary of the Austrian view was that fiat paper money could
not simply be created ex nihilo by the state and imposed on the
public. The fiat paper we use today would have to come about in
some other way.

It was one
of Rothbards great contributions to show, in his classic What
Has Government Done to Our Money? and elsewhere, the precise
steps by which the fiat money in use throughout the world came into
existence. First, a commodity money (for convenience, lets suppose
gold) comes into existence on the market, without central direction,
simply because people recognize that the use of a highly valued
good as a medium of exchange, as opposed to persisting in barter,
will make it easier for them to facilitate their transactions. Second,
money substitutes began to be issued, and circulate instead of the
gold itself. This satisfies the desires of many people for convenience.
They would rather carry paper, redeemable into gold, than the gold
itself. Finally, government calls in the gold that backs the paper,
keeps the gold, and leaves the people with paper money redeemable
into nothing. These steps, in turn, were preceded by the seemingly
minor  but in retrospect portentous indeed  government interventions
of monopolizing the mint, establishing national names for the money
in a particular country (dollars, francs, etc.), and imposing legal
tender laws.

Rothbard also
brought the Austrian theory of the business cycle to a popular audience.
Joseph Salerno, who has been called the best monetary economist
working in the Austrian tradition today, was first drawn to the
Austrian School by Rothbards essay "Economic Depressions:
Their Cause and Cure." There Rothbard laid out the problems
that business cycle theory needed to solve. In particular, any theory
of the cycle needed to account, first, for why entrepreneurs should
make similar errors in a cluster, when these entrepreneurs have
been chosen by the market for their skill at forecasting consumer
demand. If these are the entrepreneurs who have done the best job
of anticipating consumer demand in the past, why should they suddenly
do such a poor job, and all at once? And why should these errors
be especially clustered in the capital-goods sectors of the economy?

According to
Rothbard, competing theories could not answer either of these questions
satisfactorily. Certainly any theory that tried to blame the bust
on a sudden fall in consumer spending could not explain why consumer-goods
industries, as an empirical fact, tended to perform relatively better
than capital-goods industries.

Only the Austrian
theory of the business cycle adequately accounted for the phenomena
we observe during the boom and bust. The cause of the entrepreneurial
confusion, according to the Austrians, is the white noise the Federal
Reserve introduces into the system by its manipulation of interest
rates, which it accomplishes by injecting newly created money into
the banking system. The artificially low rates mislead entrepreneurs
into a different pattern of production than would have occurred
otherwise. This structure of production is not what the free market
and its price system would have led entrepreneurs to erect, and
it would be sustainable only if the public were willing to defer
consumption and provide investment capital to a greater degree than
they actually are. With the passage of time this mismatch between
consumer wants and the existing structure of production becomes
evident, massive losses are suffered, and the process of reallocating
resources into a sustainable pattern in the service of consumer
demand commences. This latter process is the bust, which is actually
the beginning of the economys restoration to health.

The concentration
of losses in the capital-goods sector can be explained by the same
factor: the artificially low interest rates brought about by the
Feds intervention into the economy. What Austrians call the higher-order
stages of production, the stages farthest removed from finished
consumer goods, are more interest-rate sensitive, and will therefore
be given disproportionate stimulus by the Feds policy of lowering
interest rates.

Equipped with
this theory, Rothbard wrote Americas
Great Depression(1963). There Rothbard did two things. First, he showed that
the Great Depression had not been the fault of "unregulated
capitalism." After explaining the Austrian theory of the business
cycle and showing why it was superior to rival accounts, Rothbard
went on to apply it to the most devastating event in U.S. economic
history. In the first part of his exposition, Rothbard focused on
showing the extent of the inflation during the 1920s, pointing out
that the relatively flat consumer price level was misleading: given
the explosion in productivity during the roaring 20s, prices should
have been falling. He also pointed out how bloated the capital-goods
sector became vis-a-vis consumer goods production. In other words,
the ingredients and characteristics of the Austrian business cycle
theory were very much present in the years leading up to the Depression.

Second, Rothbard
showed that the persistence of the Depression was attributable to
government policy. Herbert Hoover, far from a supporter of laissez-faire,
had sought to prop up wages during a business depression, spent
huge sums on public works, bailed out banks and railroads, increased
the governments role in agriculture, impaired the international
division of labor via the Smoot-Hawley Tariff, attacked short sellers,
and raised taxes, to mention just a portion of the Hoover program.

Rothbard had
been interested in business cycles since his days as a graduate
student. He had intended to work on a history of American business
cycles for his Ph.D. dissertation under Joseph Dorfman at Columbia
University, but he found out that the first major cycle in American
history, the Panic of 1819, provided ample material for study in
itself. That dissertation eventually appeared as a book, via Columbia
University Press, called The
Panic of 1819: Reactions and Policies (1962). In that book,
which the scholarly journals have declared to be the definitive
study, Rothbard found that a great many contemporaries identified
the Bank of the United States  which was supposed to be a source
of stability  as the primary culprit in that period of boom and
bust. American statesmen who had once favored such banks, and who
thought paper money inflation could be a source of economic progress,
converted to hard money on the spot, and proposals for 100-percent
specie banking proliferated.

In A
History of Money and Banking: The Colonial Era to World War II,
a collection of Rothbards historical writings published after the
authors death, Rothbard traced the history of money in the United
States and came up with some unconventional findings. The most stable
period of the nineteenth century from a monetary standpoint turns
out to be the period of the Independent Treasury, the time when
the banking system was burdened with the least government involvement.
Whats more, the various economic cycles of the nineteenth century
were consistently tied to artificial credit expansion, either participated
in or connived at by government and its privileged banks. Rothbard
further showed that the traditional tale of the 1870s, when the
United States was supposed to have been in the middle of the "Long
Depression," was all wrong. This was actually a period of great
prosperity, Rothbard said. Years later, economic historians have
since concluded that Rothbards position had been the correct one.

Rothbards
treatment of the Federal Reserve System itself, which he dealt with
in numerous other works, involved the same kind of analysis that
historians like Gabriel Kolko and Robert Wiebe applied to other
fruits of the Progressive Era. The conventional wisdom, as conveyed
in the textbooks, is that the Progressives were enlightened intellectuals
who sought to employ the federal regulatory apparatus in the service
of the public good. The wicked, grasping private sector was to be
brought to heel at last by these advocates of social justice.

New Left revisionists
demonstrated that this version of the Progressive Era was nothing
but a caricature. The dominant theme in Progressive thought was
expert control over various aspects of society and the economy.
The Progressives were not populists. They placed their confidence
in a technocratic elite administering federal agencies removed from
regular public oversight. Whats more, the resulting regulatory
apparatus tended to favor the dominant firms in the market, which
is why the forces of big business were in sympathy with, rather
than irreconcilably opposed to, the Progressive program. "With
such powerful interests as the Morgans, the Rockefellers, and Kuhn,
Loeb in basic agreement on a new central bank," Rothbard wrote,
"who could prevail against it?"

It is with
these insights in mind that Rothbard scrutinized the Federal Reserve.
He would have none of the idea that the Fed was the creation of
far-seeing public officials who sought to subject the banking system
to wise regulation for the sake of the peoples well-being. The
Fed was created not to punish the banking system, but to make its
fractional-reserve lending operate more smoothly. In The
Case Against the Fed, What
Has Government Done to Our Money?, and The
Mystery of Banking, Rothbard took the reader through the
step-by-step process by which the banks engaged in credit expansion,
earning a return by lending money created out of thin air. Without
a central bank to coordinate this process, Rothbard showed, the
banks position was precarious. If one bank inflated more than others,
those others would seek to redeem those notes for specie and the
issuing bank would be unable to honor all the redemption claims
coming in.

The primary
purpose of the central bank, therefore, in addition to propping
up the banks through its various liquidity injections and its position
as the lender of last resort, is to coordinate the inflationary
process. When faced with the creation of new money by the Fed, the
banks will inflate on top of this new money at the same rate (as
determined by the Feds reserve requirement for banks). Therefore,
the various redemptions will tend, on net, to cancel each other
out. This is what Rothbard meant when he said the central bank made
it possible to "inflate the currency in a smooth, controlled,
and uniform manner throughout the nation."

Although Rothbard
distinguished himself as a monetary theorist and as a monetary historian,
he did not confine himself to theory or history. He devoted plenty
of attention to the here and now  to critiques of Federal Reserve
policy, for example, or to criticisms of government responses to
the various fiascoes, the Savings and Loan bailout among them, to
which our financial system is especially prone. He likewise looked
beyond the present system to a regime of sound money, and in The
Case for a 100 Percent Gold Dollar and The
Mystery of Banking laid out a practical, step-by-step plan
to get there from here.

In
his work on monetary theory and history, as in his work in so many
other areas, Rothbard showed from both an economic and a moral point
of view why a system of liberty was preferable to a system of government
control. At a time when the political class and the banking establishment
are being subjected to more scrutiny than ever, the message of Rothbard
takes on a special urgency.

For that reason
we should all be grateful that his monetary work, and that of the
other great Austrian economists, is being carried on by Murray Rothbard's
friend and colleague Ron Paul. By my reckoning, no one in history
has brought true monetary theory and history to a larger audience.